COVID-19 has prompted a staggering growth in government borrowing. This borrowing is funding vital support to households and businesses as economies plummet into recession. It is also funding the procurement of emergency health commodities and the rapid implementation of disease control strategies. Thank goodness for the borrowing!
But, what comes next?
We are back at a junction we have recently crossed. Who remembers the 2008/9 financial crash and all the borrowing that followed that?
Is there anything we can learn from a quick journey back in time?
UK government borrowing and COVID-19
Between April and June 2020, to fund its emergency COVID-19 support packages, the UK government borrowed nearly £130 billion. This is more than double what it borrowed in the entire preceding year (April 2019 to March 2020).
By the end of June 2020, government debt had grown to the equivalent of 99.6% of Gross Domestic Product (GDP). For reference, it is frowned upon to owe more than 60% of your GDP.
Whichever side of parliament you sit on, we cannot continue to borrow £130 billion a quarter. Sooner or later interest rates will grow, and borrowing will become too expensive.
But, another word for reducing borrowing is austerity. And people have come to associate austerity with all the traits of a hardy pantomime villain — conjuring images of pain, hardship and inequality.
Today, in the pantomime’s plot, austerity is a major cause of our woes — effortlessly eliciting boos from everyone. As we leave the theatre, after an evening’s drama and innuendo, we look forward to a better future, in which austerity has no place and we all live happily ever after. But have we got this right?
The pantomime’s plot
A recent New York Times article explored the causes and effects of British austerity following the 2008/9 financial crisis. The article outlines how austerity slashed away at budgets for policing, housing and welfare, changing the face of British society and politics for the worse. The narrative is so widely believed that both blue and red sides of our population heaved a collective sigh of relief when Theresa May announced that the era of austerity was over in 2018. This had been the cornerstone of her party’s economic policy for the previous eight years.
On top of this, we have seen spending cuts for prisons, courts, libraries, road maintenance and housing support. Local Councils have been on a fat burning diet even Atkins would be proud of. In 2018 Frank Fields MP reported that, by 2021, £37 billion less will be spent on welfare than in 2010.
The same New York Times article reports that since the start of austerity the use of food banks doubled, families on benefits are thousands of pounds worse off, 600,000 children have fallen into relative poverty, and murders and robberies have surged to their highest numbers in a decade.
Can all this be true? So much pain, just to bring down the deficit?
Or could the pain be coming from something deeper? Is austerity taking the flack for a more sinister and covert villain in our pantomime?
First things first, what happened to the deficit?
Whatever else happened, austerity achieved its primary objective. The deficit was reduced.
There was a considerable increase in borrowing following the 2008/9 financial crisis, both absolutely and relative to the size of the economy, which was then reduced.
The orange line indicates a broadly acceptable level of borrowing relative to the economy under normal circumstances (3%). The annual deficit was back below this orange line by 2016/17, and remained there for the next four years.
Theresa May was right, at least in one respect, the need for austerity was over.
How was the deficit reduced?
Those of us who have watched this pantomime know a story of austerity by pain and budget cuts.
But, based on the government accounts, this is not exactly what happened.
The magic bean was actually the economy. GDP remained almost constant for two years following the 2008/9 financial crash, and then started to grow again.
With this, government revenue also grew — from £570 billion in 2007/8 to £800 billion in 2018/19. Government revenue contracted in 2008/9 and 2009/10, but has grown in each year since.
And with this, government expenditure grew, from £630 billion in 2007/8 to £850 billion in 2018/19.
It looks like the reduction in the deficit was primarily achieved through a growing economy and government revenue base, not through cuts.
But what about rising prices and our growing population?
Yes, government expenditure has gone up. But if prices and the number of people in our population went up faster, that money may now buy less per person than it did before.
After you take account of inflation and population growth, the economy shrank in 2008 and 2009. But it has grown in every year since.
On the other hand, government expenditure grew in 2008 and 2009, but marginally contracted after that. After adjusting for inflation, the government does spend more per person than before the crash, but slightly less than just before austerity.
There was a clear change in the trend of real government expenditure growth. Before austerity, government expenditure per person was growing faster than prices. Once austerity kicked in, government expenditure per person grew marginally slower than prices.
Perhaps this is one of the burning embers that explain the hot and smokey anger around austerity. The spending power of government did stop growing and has marginally reduced, although not to pre-crash levels.
This does not seem like enough to hold the story together. The common austerity plot is not one of things staying roughly the same — it is one of government cuts and things getting worse.
What were all the cuts about?
While there has not been a significant cut in the spending power of government, there has been a reallocation of how it spends its money.
The largest public sector ‘function’ to see a significant decrease in spending during austerity, once inflation is taken into account, was actually education. Otherwise, the main changes were an initial increase then stagnation in expenditure on social protection (welfare and pensions), and a stagnant period followed by an increase in spending on health.
It seems that cuts to education, specific benefits, policing and housing were actually the result of decisions to increase spending on health and certain aspects of social protection.
This is not the pantomime plot I knew at all!
What about the poverty, crime and food banks?
Get ready for some more surprising twists.
Murder, robbery and knife crime have all increased, but overall crime, including violent crime and burglaries, has gone down.
The number of children living in low income households has increased, but as a percentage of all children it has remained the same.
The documented use of food banks has considerably increased, but it hard to know if this reflects a growth in the supply of food banks, a growth in the demand for food banks, a growth in reporting of food parcels delivered, or all three.
So who is the pantomime’s real villain?
Could the real villain, and kindle for our anger toward austerity, be longer-standing inequality?
Income inequality in the UK increased during the 1970s and 80s and, with the exception of a large rise and fall in the early 2000s, has been broadly stable since.
While inequality may be relatively stable, it is also relatively large. There is substantially more income inequality in the UK than there is in most other rich countries. Of the forty countries the OECD use to make international comparisons, only eight have more income inequality than the UK. Lithuania is the only European country in this comparison with more income inequality than the UK.
The poverty gap is a measure of how much lower the mean income of the poor is to the overall median income (a bigger number means more inequality). In the UK this is 0.37. In France and Germany it is 0.25.
20 years ago 31% of children in the UK lived in ‘relative low income’ households. 10 years ago it was 30%. Today, it is still 30%.
Could this be our real villain? The main source of our anger? Not a recent policy, but longer standing, systemic and entrenched inequality in our society? Not something that one political party can blame on another, but the results of decades of decisions by both major parties and the very fabric of the way we live our lives?
As we move to our next period of austerity…
Not immediately, but at some point on the horizon, we will have to reduce our borrowing.
Unless the basics of how we manage our public expenditure change, £130 billion a quarter will have to come down to something closer to £15 billion a quarter. It’s fine to borrow in hard times, but it is unlikely we can continue to spend tomorrow’s money indefinitely. At some point tomorrow comes!
From a quick glance back at our most recent attempt to reduce our deficit, we can take three simple lessons:
- Reducing the deficit does not need to be all about cuts. Cuts are just one tool in the box. If interest rates and inflation remain low, economic growth and a growing revenue base can do a lot of the heavy lifting instead.
- There is a deeper villain in our society: inequality. We are a significantly more unequal society than most of our wealthy peers. This is a problem in itself, but it is also the context within which we will need to reduce borrowing. There are groups in our society who are very vulnerable to changes in government spending, and other groups who are not so vulnerable.
- If, having experienced cuts to Local Councils, housing and police, we realise that actually we like a well funded system of local government, with more police on the streets and more support for accommodation, we are free to move back in that direction (nothing about the deficit or austerity need stop us). While these cuts were branded as austerity, it looks like they were actually about trade offs between competing government departments. If we want to go back to how it was before, we just need to accept the reduced increases in spending on health and social protection that this would entail.
Perhaps this pantomime, with austerity as the villain, is just a story we have accepted to explain our deeper social inequality? As an audience we like it. The poorer among us need an enemy to be angry at. The richer among us need a scapegoat to take the blame. The narrative works for everyone.
But, if we continue to believe the fairy tale, we will leave our deeper inequality unchecked.